Short term business finance is necessary based on the fact that they tackle the problems associated with immediate cash flow. These includes such purposes as the purchasing of the materials, payment of the hired labor, replenishing of stock, paying of immediate bills and so on. This is the reason why the short term business finance is important. The different sources include; Bank overdraft, Leasing, Credit cards, Trade credit, and Bank loans.
On the other hand there also the Long term financial sources.This is the capital needed for a long period of time, mostly more than five years to either start a business or expand an already established business. In most cases the capital is used in the purchase of land, machinery, buildings, and equipments. The financial sources includes; Owners capital, Grants from local or national government, Bank loans, Debentures, Sale of assets, Retained profit, Owners capital, and Share capital.
The widespread type of finances include lease, grant, venture capital, factoring, debentures, bank loans, shares, retained profit or earnings, bank overdraft, short term loans, hire purchase, and trade creditors.Lease involves a situation whereby a Company purchases an asset on behalf of a business and the asset is availed to the business for use but reserves the ownership of the asset. It can be either financial lease or operation lease. Grants are extended to firms whose services benefit the community and they are given by either the government or private organizations. The initial money raised at the inception of the business is the venture capital. Debentures are loans that are usually given to the company.
They are different from other loans in that they have a fixed interest and a fixed repayment time.They may be secured or be based on the reputation of the company. The interests are usually deducted from the profits of the company. Debentures can either be registered or convertible.
The former cannot be easily transferable because the legal procedures need to be followed. The later can be converted to become stock at the end of the agreed period. The other source is the normal bank loans which are more difficult to get particularly the long term loans. The interests on loans are a bit higher than debentures. Most of the loans are meant to serve the long term projects that the business wishes to undertake.Loans can be substituted with other sources of business finance that are less complicated and more suitable. Shares are also a source of finance, these can be ordinary or preferential and both are entitled to a portion of the profits at the end of the year though the preferential are the ones who are considered first. Retained profits also assist in ensuring that the business expands.
The bank overdrafts are similar to other loans though the interest paid is only on the amount withdrawn. They are a form of short term credit of the account holders of a given bank.These allow the business to make a withdrawal that is more than the actual balance in the account. Trade creditors assists businesses so much becomes at times they deliver goods to the business without being paid and wait for some of the goods to be sold for them to collect their money. There is also hire purchase that gives the business a chance to use equipment or any other product before the full payment is done.
The above discussed financial sources are some of the best to be adopted by any business. However, as mentioned each has its own advantage and disadvantage (Pike 79).